Japanese Regulators Carries Out Raid on CoinCheck

Following its $530M hack at the end of January, Japanese financial regulators apparently carried out a raid on the offices of cryptocurrency CoinCheck last week.

According to the Asian Review, the Financial Services Agency (FSA) inspected the Tokyo-based exchange operator under the revised Payment Services Act to see if the funds could indeed be returned to customers and to check its security measures to ensure it could prevent another attack. Finance Minister Taro Aso said, “The investigation is being conducted to protect the current users,” and demanded that customers receive “appropriate” treatment in response to their losses.

The FSA also ordered all other Japanese cryptoexchanges to report on their risk management protocols.They demanded a written report from Coincheck by February 13th on January 29th. However, given the high profile nature of the heist and fears surrounding it, the FSA decided to conduct an investigation before the report was officially submitted. It is the first on-site inspection by the FSA in Japan.

CoinCheck saw $530M (about 58 billion yen) of the cryptocurrency NEM taken from its users, victimizing around 260,000 of its customers.

The NEM Foundation, the organization behind NEM, said last week it was closely monitoring the stolen currency. “None of the stolen funds have been sent to any exchanges. As long as those funds are off public exchanges they will be very difficult to liquidate, especially in large amounts.”

According to Reuters, Japan’s FSA said it had been urging Coincheck to fix vulnerabilities in its computer systems ahead of the hack; and this was one of the reasons it had not yet received official approval as an exchange. Coincheck was among 16 cryptoexchanges allowed to provisionally continue operations, while their applications are being assessed for official approval by the FSA. On January 17th, the Japanese FSA had approved registration of an additional 16 cryptocurrency exchanges in Japan.

Following recent restrictions imposed on the cryptocurrency industry in China and South Korea, Japan has seen its share of global crypto trading rise. Ken Kawai, a partner at Anderson, Mori and Tomotsune in Tokyo said there was a lack of cryptocurrency expertise at the FSA, partly because it has struggled to attract experts with its limited government salaries. “Innovation is too fast for (the FSA) and they cannot understand what, let’s say, a token is, and what’s the real function of the blockchain and what is a cold wallet and a hot wallet…at the beginning of last year, their knowledge was very limited”, Kawai told reporters.

Kawai said that security measures had been imposed following the Mt. Gox cryptoexchange hack in 2014, for instance, the company’s money and users’ money now need to be segregated, but they don’t specify how much cryptocurrency should be kept in offline wallets for security, for instance. This was one of the main reasons behind the CoinCheck hack last month, as all NEM cryptocurrency was kept in hot wallets, connected to the Internet.